July 3, 2002
President Bush claims that there are only a few bad apples in American business, and that back when he was in the oil business, he was not one of them.
He is wrong on the first count and on shaky ground on the second.
His first mistake is the most serious. As long as political and business leaders assert that most accounting is pristine, most chief executives' pay is not excessive, most Wall Street analysts publish believable research reports and most corporate boards are vigilant, the longer it will take to restore credibility to our capital markets.
The fact is that statistics indicate that for much of the 1990s, accounting at publicly held companies was deceitful while boards of directors looked the other way.
Statistics show that CEO pay remains obscene. And statistics show that analyst reports still cannot be believed.
Start with earnings. For half a century, profits grew at the rate of gross domestic product (GDP), or annual economic growth, not adjusted for inflation. In the late 1990s, profits grew at three times that rate. At the same time, the operating profits of Standard & Poor's 500 companies were soaring far beyond the growth of profits in the entire economy.
Both were indications that companies were inflating their operating earnings, because Wall Street wanted them to beat quarterly earnings expectations. Companies across the spectrum were working backward – coming up with the desired profit figure first, then fiddling with revenue and expenses until they hit the number.
Wall Street analysts? All you need to know is that a sell recommendation is still almost unheard of, and back in the 1990s, was virtually nowhere in evidence.
The newsletter Crosscurrents by H.D. Brous & Co. shows that today, of the 30 Dow Jones industrial stocks, 31 percent of analyst recommendations are strong buys, 31.9 percent are buys, 33.3 percent are holds, a mere 2.8 percent are sells and 0.9 percent are strong sells.
Martin D. Weiss of Florida's Weiss Ratings, Inc. did a study of analysts' recommendations on companies that filed for bankruptcy this year. Hear this: On the date of the bankruptcy filing, 31.4 percent of the recommendations were buy or the equivalent, 59.5 percent were hold or equivalent and only 9.1 percent were sell or equivalent.
Six months before bankruptcy, 55.4 percent were buys and only 4.1 percent were sells.
In 1990, the average initial public offering rose 70 percent the first day. We now know that large Wall Street firms were "laddering" the price: A firm would be permitted to buy in at a pre-arranged price, the next firm at a higher pre-arranged price, etc.
Back in the mid-1960s, U.S. corporate CEOs made 60 to 80 times what the average employee made. Now it is 400 to 500 times what the average employee makes. Fortune magazine calls it "the great CEO pay heist" and predicts, "the madness won't stop."
Among publicly held companies, phony accounting and obscene CEO pay have become deeply ingrained, thanks greatly to compromised auditing firms and boards of directors. Meanwhile, Wall Street mendacity has reached news highs.
I do think the worst is over, but to keep the disease from recurring, criminal prosecutions must be pressed forward. It does not help if the nation's chief executive pretends that the problems are isolated.
Yesterday, President Bush reacted with hostility to a Paul Krugman column in The New York Times. Krugman wrote about Bush's experience with Harken Energy in the late 1980s.
I had touched on that Harken adventure back in 1992, when I barely knew who George W. Bush was, but I knew that his father was president. What I was focusing on then was the role of the notorious Bank of Credit and Commerce International (BCCI) in Harken and other deals.
I devoted an entire column to the Harken mess in fall of 2000. At the time, I thought that Harken could become another Whitewater, because Bush had been eight months late reporting a stock sale that grossed him $850,000. Bush knew of bad corporate news that had not been revealed.
Bush was cleared by the Securities and Exchange Commission, but I wouldn't be surprised if the subject comes up in the news again as people look more and more into corporate maneuverings.
Don Bauder: (619) 293-1523; firstname.lastname@example.org Copyright 2002 Union-Tribune Publishing Co.
[webmaster's note: The San Diego Union Tribune Webmaster still refuses to associate an article with a permanent link, when the article appears. Hence, instead of linking the article, I am compelled to break the letter of the law and paste the article onto my own site, so that I do not risk losing it entirely, and so that my time and the time of visitors is not wasted, and so that the columnist's comments may reach the public. I will change this practice as soon as the Union Tribune shows me how to do so, thus allowing me to bring more visitors to their site, to avoid the collosal waste of my time inherent to broken links, and to follow proper legal copyright procedures. The matter is up to them. It is possible that I am missing some permanent link they are posting, but they are making no effort to make such links clear.
At present, to follow the law would mean not having any web page and to not link anything anywhere. I would be glad to work with them constructively on this, and should Mr. Bauder read this note he is welcome to contact me for my thoughts on the matter, as it takes money out of his pocket as well.]